Court Hears Arguments on Challenge to School Wi-Fi Bus Subsidies

 On November 4, oral arguments were held before the U.S. Court of Appeals for the Fifth Circuit in the case of Molak v. FCC. The case involves a legal challenge to the Commission's October 2023 School Bus Wi-Fi Order. The Petitioners, represented by David A. Suska during oral arguments, claim that the agency lacks authority under Section 254 of the Communications Act to use E-Rate funds to subsidize Wi-Fi on school buses. 

By a declaratory ruling passed on a 3-2 vote of the Commission's members, the agency is interpreting the law to effectively extend the Emergency Connectivity Fund (ECF) beyond its sunset date of June 2024. The ECF was a $58.2 billion subsidy program for subsidizing Wi-Fi hotspots and broadband services for school buses and off-campus connectivity. The program was authorized under the American Rescue Plan Act of 2021 (ARPA) as a lockdown-era emergency measure. Section 7402 of the ARPA expressly authorized subsidies for supporting "eligible equipment" and advanced telecommunications and information services for use by students, school staff, and library goers "at locations that include locations other than the school" and "other than the library."

 

In our February 2024 Perspectives from FSF Scholars, "FCC's School Bus Wi-Fi Subsidy Lacks Statutory Support," Free State Foundation President Randolph May and I addressed legal problems with the School Bus Wi-Fi Order. Section 254 of the Communications Act is more limited than Section 7402 of the ARPA. Section 254(h)(1)(B) authorizes the Commission to provide subsidy support to telecommunications carriers for "services to elementary schools, secondary schools, and libraries for educational purposes." And Section 254(h)(2)(A) directs the Commission to adopt competitively neutral rules to enhance "access to advanced telecommunications and information services for all public nonprofit elementary and secondary school classrooms, health care providers, and libraries." In short, we concluded that the FCC overreached in subsidizing school bus Wi-Fi subsidies under Section 254 because buses are notschools, classrooms, or libraries – and schools are not telecommunications carriers. 

 

Before the Fifth Circuit, Mr. Suska ably argued that the School Bus Wi-Fi Order exceeded the law in four ways: (1) by making subsidies available to anyone, not just telecommunications carriers; (2) by making subsidies available for any kind of service, not just telecommunications services; (3) by making subsidies available for equipment, which is not in the statute; and (4) by providing subsidies to schools instead of telecommunications carriers.  

 

On behalf of the FCC, Ms. Rachel Proctor May argued: "The word 'classroom' is best interpreted to include buses that have been outfitted with Wi-Fi so they can serve as rolling study halls." That type of elastic interpretation might have sufficed under the old "Chevron doctrine." But that is a decidedly strained and result-driven interpretation by the FCC, and one the agency cannot rely on for its authority now that the Supreme Court's decision in Loper-Bright v. Raimondo has overruled Chevron. Moreover, it goes against human experience to think that anything but the tiniest amount of homework will take place on Wi-Fi-connected school buses. No claimed agency technical expertise about imagined homework on school buses ought to rescue the FCC from the overreach of its School Bus Wi-Fi Order. 

 

A significant portion of the oral arguments before the court addressed threshold procedural issues regarding exhaustion of administrative remedies and standing. Yet if the Fifth Circuit rules on the merits, there is a strong likelihood that the court will vacate the FCC's School Bus Wi-Fi Order. 

Lawsuit Challenges FCC Order Subsidizing Wi-Fi Away from Schools and Libraries

On August 29, a petition was filed in the U.S. Court of Appeals for the Fifth Circuit that challenges the legal basis for the FCC's July 2024 Off-Premises Wi-Fi Order. The petition filed in Molak v. FCC states that the Commission's order "unlawfully expands the FCC’s E-Rate Program to subsidize Wi-Fi service and equipment anywhere students might go." E-Rate is part of the Universal Service Fund (USF), which is funded by surcharges – functional taxes – paid each month by voice consumers. The petition alleges that the order’s increase in E-Rate Program outlays will directly increase USF surcharges that the petitioners pay each month. It also alleges that subsidizing Wi-Fi use away from school premises "enabl[es] unsupervised social-media access by children and teenagers."

The unlawfulness of the Commission's Off-Premises Wi-Fi Order is the subject of my August 20 Perspectives from FSF Scholars, "FCC Can't Subsidize Wi-Fi Use Away from Schools and Libraries." As explained therein, Section 254(h) of the Communications Act, the statutory provision that provides the legal basis for the E-Rate Program and upon which the Commission relies for its order, authorizes universal service subsidies only to or for "schools," "classrooms," and "libraries." But subsidies for off-premises Wi-Fi use – potentially anywhere in the world – are not included in the statute.

 

Moreover, the legal challenge to the Off-Premises Wi-Fi Order in Molak v. FCC parallels a prior legal challenge with an identical case name that was filed in the Fifth Circuit last year against the Commission's 2023 School Bus Wi-Fi Order. The prior agency order authorized universal subsidies for Wi-Fi equipment and service on school buses. The unlawfulness of the prior order is the subject of a February 2024 Perspectives from FSF Scholars by Free State Foundation President Randolph May and I, titled "FCC's School Bus Wi-Fi Subsidy Lacks Statutory Support."

 

In both Molak v. FCC cases, the petitioners raise important issues about agency accountability to the law and to the American public. The outcome of these pending legal challenges to administrative agency overreach will have implications for responsible spending of precious dollars collected from the public and for child online safety.

TMT with Mike O'Rielly – Ep 10: History, Present, and Future of the USF

Episode 10 of "TMT with Mike O'Rielly," a videocast featuring former FCC Commissioner and Adjunct Senior Fellow at the Free State Foundation Michael O'Rielly, was released on August 8. In this episode, titled "The History, Present, and Future of the Universal Service Fund," Mr. O'Rielly is joined by guest Dr. Harold Furchtgott-Roth, a former FCC Commissioner and currently Senior Fellow and Director for the Center for the Economics of the Internet at the Hudson Institute. 

TMT with Mike O'Rielly - Ep 9: FCC Regulations and NTIA BEAD Burdens

Episode 9 of "TMT with Mike O'Rielly," a videocast featuring former FCC Commissioner and Adjunct Senior Fellow at the Free State Foundation Michael O'Rielly, was released on July 30. In this episode, titled "FCC Regulations and NTIA BEAD Burdens," Mr. O'Rielly is joined by guest Grant Spellmeyer, President and CEO of ACA Connects. Their conversation also includes FCC matters and issues such as public utility regulation of broadband as well as the video services market. 

ACA Connects is a member association of independent broadband, video, and communications providers. 

TMT With Mike O’Rielly – Ep 3: Private Equity & Federal Broadband Funding

Episode 3 of the videocast TMT With Mike O'Rielly was released on June 4. It features a discussion between former FCC Commissioner O'Rielly and former FCC Ajit Pai. Be sure to check out their discussion of the private capital investment in broadband, the impact of rate regulation on investment, and broadband subsidies under the RDOF and BEAD Programs. 

Senators' Court Brief Challenges FCC Authority to Subsidize School Bus Wi-Fi

On April 9, a group of seven U.S. Senators, including Sens. Ted Cruz and Marsha Blackburn, filed an amicus curiae brief with the Fifth Circuit in the case of Molak v. FCC. The case involves a legal challenge to the Commission's authority under Section 254(h)(2)(A) of the Communications Act to use E-Rate funds to subsidize Wi-Fi on school buses. The Republican Senators' position that the statute does not authorize E-Rate subsidies for school bus Wi-Fi and their primary policy objection to those subsidies are put forth succintly in the brief's summary:

The Federal Communications Commission (FCC)'s plan to subsidize Wi-Fi on school buses is unlawful and misguided. Under section 254 of the Communications Act of 1934, the FCC is authorized to use E-Rate funds only "to enhance . . . access to advanced telecommunications and information services for . . . school classrooms . . . and libraries." 47 U.S.C. § 254(h)(2)(A) (emphasis added). But rather than follow the law restricting the use of E-Rate funds to only classrooms and libraries, the FCC chose to put Wi-Fi on school buses. And this decision comes in the wake of Congress’s decision to not renew the COVID program that authorized the FCC to temporarily fund Wi-Fi off-campus during the pandemic. School buses are neither "classrooms" nor "libraries" within the meaning of Section 254, making the FCC's decision to fund Wi-Fi on school buses contrary to law. 

Moreover, the FCC's proposed expansion of funding raises concerns about child safety and a lack of accountability regarding federal spending. The FCC's E-Rate plan funnels millions of dollars to expired COVID-era policies without any evidence that unsupervised teenagers with smartphones on school buses will opt for trigonometry over TikTok. The FCC has not performed any analyses, produced any survey data, or even required an accounting to determine whether the money already spent on equipping school buses with Wi-Fi has resulted in more students completing their school assignments or otherwise served the academic purposes for which the COVID-era funding was intended. Rather than conduct a careful analysis based on public comment of the efficacy of funding school bus Wi-Fi, the FCC's E-Rate program greenlights children's unsupervised Internet access while failing to address the well-documented and corrosive effects on minors of social media, online pornography, and cyber bullying. The FCC's proposal is unsupported by evidence that the existing program works and lacks appropriate guidelines to ensure that the E-Rate funds advance the interests of children, parents, teachers, and taxpayers.

In our February 2024 Perspectives from FSF Scholars, "FCC's School Bus Wi-Fi Subsidy Lacks Statutory Support," Free State Foundation President Randolph May and I addressed legal problems with the Commission's order that is now under review in Molak v. FCC.  

State Court Rules that USAC is Tax-Immune in Lifeline Case

On March 7, the Washington State Supreme Court issued its decision in Assurance Wireless USA, LP v. State of Washington Department of Revenue (2024). At issue in the case is whether funds received by telecommunications carriers participating in the federal Lifeline program are subject to Washington's retail sales tax. In a unanimous 9-0 decision, the Washington Supreme Court concluded that because the Universal Service Administrative Company (USAC) operates as an instrumentality of the federal government, imposition of the retail sales tax violates the intergovernmental tax immunity doctrine. The effect of the court's decision is that it ensures that tax burdens are not saddled on Lifeline program providers and low-income beneficiaries.

The USAC is the FCC's appointed non-profit entity for administering the Universal Service Fund and the Lifeline program. The Washington Supreme Court determined that the USAC is the "buyer" from whom telecommunications carrier and Lifeline program participating provider Assurance Wireless should have been collecting the tax. That is to say, the court determined that the incidence of the state retail sales tax falls on the USAC.

Under the intergovernmental immunity doctrine, the federal government and instrumentalities closely connected to it are immune from all forms of taxation absent express Congressional waiver of immunity. The Washington Supreme Court determined that provisions contained in Section 254(e) and 254(f) of the Communications Act do not constitute Congressional waivers. Looking to factors identified in U.S. Supreme Court jurisprudence for determining whether an instrumentality is closely related to governmental activity and therefore tax-immune, the Washington Supreme Court wrote: 

Weighing all the factors, we conclude that USAC is an instrumentality of the federal government. It exists solely to carry out the FCC's mission of advancing universal service, which includes the Lifeline program, and USAC pursues no independent business objectives. Congress has acknowledged the FCC's reliance on USAC and approved of their relationship as the means of implementing universal service programs. Further, although USAC is nominally an independent nonprofit, the FCC's regulatory control over USAC's operations, leadership composition, and finances have produced an entity so closely related to the FCC that we conclude it operates as an instrumentality of the federal government for purposes of the intergovernmental tax immunity doctrine. 

In a November 9, 2024 FSF Blog post, "State Court Weighing USAC on Tax Immunity for Lifeline," I previewed this case. I suggested that Assurance Wireless USA had a stronger position on the tax immunity of the USAC. Former FCC Commissioners Robert McDowell and Mignon Clyburn were among those who filed amicus curiae briefs favoring tax immunity for the USAC. The effect of such immunity is that it better enables Lifeline to serve its programmatic purpose of providing telecommunications services to qualifying low-income individuals. 

 

Universal service reform and the Lifeline program were topics for discussion during the hot topics in communications law and policy panel at the Free State Foundation's 16th Annual Policy Conference held on March 12.

 

 

Video of that panel and former FCC Commissioner Mignon Clyburn in discussion with former Commissioner Mike O’Rielly and two current Commission members can be found on FSF's video web page.